The EconomistMarch 28th 2020 Finance & economics 651E
arly in march the oil market’s central
banker seemed to go berserk. Saudi Ara-
bia, the most powerful member of the Or-
ganisation of the Petroleum Exporting
Countries (opec), has long adjusted its sup-
ply to help stabilise the price of crude. Rus-
sia had teamed up with opecsince 2016,
but as covid-19 drove demand relentlessly
down, it refused opec’s plea to cut produc-
tion. Saudi Arabia retaliated, declaring its
intent to flood global markets. The price of
Brent crude halved between March 5th and
18th, to $25 a barrel.
America is stepping in. On March 19th
its Department of Energy said it would buy
77m barrels of American crude to store in
its strategic stockpile. Ryan Sitton, a Texas
oil regulator, is mulling restrictions on his
state’s output, which accounts for 41% of
America’s total. “The world is in an extraor-
dinary time,” he says. “We need to consider
extraordinary solutions.” News on March
23rd that President Donald Trump had ap-
pointed an energy envoy to Saudi Arabia
raised hopes that America might broker a
truce between the kingdom and Russia.
America is not a newcomer to oil-mar-
ket meddling. The formation of opecwas
inspired in part by the Texas Railroad Com-
mission (on which Mr Sitton now serves).
In the 1930s, when the price of oil wallowed
below $1 a barrel, troopers fanned across
Texas to enforce the commission’s produc-
tion limits. As America’s oil imports rose,
attention shifted to securing supply. The
Strategic Petroleum Reserve was created in
1975, after the Arab oil embargo.
Now that shale has transformed Ameri-
ca into the world’s biggest oil producer, the
country has renewed interest in propping
up the price of crude. Mr Sitton maintains
that production cuts may be necessary to
ensure that America’s shale industry sur-
vives covid-19. But America will find opec’s
mantle an awkward fit.
The vast salt caverns along America’s
Gulf coast that contain the strategic reserve
are already about 90% full, so they cannot
store enough excess supply. Texan regula-
tors have not tried to curb output for de-
cades. Any attempt would surely meet legal
and practical hurdles. A grand supply
agreement between America, Saudi Arabia
and Russia might boost the oil price, but
only temporarily.
“The price war has become largely irrel-
evant,” says Ben Luckock of Trafigura, a
trading company. Saudi production nowNEW YORK
Saudi Arabia has stopped trying to
support oil prices. Enter AmericaCommoditiesBuyer beware
C
hristine lagarde took over as the
president of the European Central Bank
(ecb)in November intent on peacemaking.
The bank’s negative interest rates and
bond-buying were reviled in the euro area’s
northern countries. In order to heal the rift
Ms Lagarde launched a year-long review of
the ecb’s strategy. Few investors expected
policy to change much in 2020.
Covid-19 upended all that. On March
18th the ecbannounced an emergency as-
set-purchase scheme that would buy
€750bn ($809bn) in government and cor-
porate bonds. With its existing pro-
grammes, the bank will hoover up over
€1trn in assets this year—equivalent to 9%
of euro-area gdp. But even this might not
be enough to gin up the economy.
The severity of the pandemic means
that the ecbhas been bolder and consider-
ably more flexible than economists would
have thought possible a few months ago,
says Piet Christiansen of Danske Bank. In
large part that is because the ecbis amend-
ing some of the rules that have until now
governed its asset purchases.
One self-imposed rule concerns the
composition of purchases. The ecbgener-
ally tries to buy government bonds in pro-
portion to the capital each member state
puts into it (or its “capital key”), which is
roughly in line with the size of its economy.
This time the bank will be more flexible. It
could, for example, buy more Italian and
Spanish bonds, even though these together
account for around a quarter of the capital
key. As the virus spread across the south of
the euro zone, investors had begun to de-
mand a higher premium for holding south-
ern states’ bonds—and Ms Lagarde did not
help when she remarked that she did not
consider it the ecb’s job to close yield
spreads. The announcement of the emer-
gency bond purchases helped to calm
those nerves.
More controversially, the ecbsays its
emergency purchases will not be bound by
its self-imposed “issuer limit”, which had
meant that it could not hold more than a
third of a member’s sovereign debt. Its
holdings of German and Dutch bonds have
been fast approaching the cap. The deci-
sion could raise heckles in Germany, where
the rule is seen as ensuring that the ecb’s
purchases do not monetise national debt.
The ecbis breaking more of its own
rules. It is expanding the range of assets it
will buy. The new scheme will cover Greeksovereign bonds; they had previously been
deemed ineligible because of their low
credit rating. And the ecbwill start to buy
assets with maturities of less than a year.
That has a happy interaction with recent
fiscal easing. On March 23rd the German
government said that it would borrow
€156bn in order to support its economy (see
Europe section). Much of Germany’s bor-
rowing will take the form of short-term
bills, says Frederik Ducrozet of Pictet, an
asset manager.
Even with all this flexibility, there is still
a question of whether the stimulus is suffi-
cient. The extent of the economic damage
done by the virus is slowly becoming clear.
On March 24th a survey of purchasing
managers indicated the steepest drop in
activity in its 22-year history. Investors’
medium-term inflation expectations, as
measured by the five-year forward swap
rate, have fallen to 0.8%, well below the
bank’s target of inflation close to, but below
2%. That suggests that investors think
more easing is needed to ensure a healthy
expansion after the epidemic ends.
One reason for investors’ gloom may be
that governments are still doing too little.
Even after Germany’s splurge, new spend-
ing across the euro zone amounts to only
2% of gdp. Economists at Citibank esti-
mate that something nearer 5% is warrant-
ed. Leaders were set to consider whether to
make cheap credit lines available to gov-
ernments through the zone’s bail-out fund
after The Economist went to press. Such
talks tend to become mired in arguments
over what type of strings should be at-
tached to the cash. The pandemic means
that a deal looks likelier than ever. But cen-
tral bankers are also well aware of another,
less happy, link between monetary and co-
ordinated fiscal policy. The more the ecb
does, the less governments feel they need
to take action. 7The European Central Bank’s latest
salvo might not be big enoughThe euro zoneRipping up the
rules